On May 3, 2018, Taylor-Copeland Law filed a class action suit against Ripple Labs, its wholly owned subsidiary XRP II, and Ripple Labs’ CEO Brad Garlinghouse on behalf of aggrieved investors who have sustained losses as a result of Ripple’s sale of XRP tokens (read the full Complaint here). The complaint alleges Defendants have earned massive profits in violation of state and federal securities laws by selling XRP to the general public, in what is essentially a never-ending initial coin offering. The complaint further alleges that XRP has all the hallmarks of a security and that Ripple tries to obscure its sales of XRP by doing so on exchanges rather than directly.

XRP Investors

If you invested in XRP and are interested in protecting your investment and joining the class action, please contact us with information about your investment losses.

On April 1, 2018, the FBI arrested Sohrab (Sam) Sharma and Robert Farkas, two co-founders of Centra Tech, Inc., for securities fraud and wire fraud crimes in connection with a cryptocurrency initial coin offering (ICO) that raised at least $32 million through material misrepresentations and omissions. The FBI and SEC later arrested and charged the third Centra co-founder, Raymond Trapani, on April 20, 2018. Centra’s arrests and charges are the first serious criminal actions taken against ICO founders and promoters. Even before the arrests and criminal charges, Taylor-Copeland Law was pursuing a civil suit on behalf of aggrieved investors against Centra in the Southern District of Florida, where he has been appointed co-lead counsel.

The Chief of the SEC Enforcement Division’s Cyber Unit, Robert A. Cohen, alleged “that the Centra co-founders went to great lengths to create the false impression that they had developed a viable, cutting-edge technology.” He warned that “investors should exercise caution about investments in digital assets, especially when they are marketed with claims that seem too good to be true.” The SEC’s complaint alleges that Centra made false claims of partnerships with Visa and MasterCard, fraudulent claims that Centra held state licenses, used fictional executive biographies to promote Centra, and falsely claimed that investors would be paid a dividend.

The SEC’s complaint uses Centra’s public statements, marketing materials, and even text messages to form its claims. In September 2017, after Centra’s co-founders realized that their misstatements about the Visa and MasterCard partnerships may be in violation of securities laws, they began texting each other, “Everything gotta get cleaned up.” “Anything that doesn’t exist current[ly] we need to remove […] do it asap.” In October 2017, Visa sent Centra a cease-and-desist notice after Centra’s website continued to reference a partnership with Visa.

The co-founders falsely appropriated photos and created fake LinkedIn profiles for their fictional management executives. Sharma messaged Trapani that he “had one girl contact me lol [and] she said take my picture off your site.” Sharma sent Trapani a picture of another fake team member and asked, “U know anyone [t]hat looks like this guy… I need someone who kinda looks like him[.] I can’t just change him now People are gonna be like wtf.”

The SEC’s complaint makes four separate claims that Centra violated U.S. securities laws. It also seeks permanent injunctions against the co-founders’ offering of unregistered securities, the return of ill-gotten gains plus interest and penalties, a permanent bar for each of the co-founders from serving as an officer or director of any public company, and a permanent prohibition for the co-founders from participating in offering digital or other securities.

The SEC and FBI actions signal the increased regulatory focus on crypto-currencies and token sales. They are also a reminder that aggrieved crypto-currency investors have a number of remedies available to them under U.S. law, including civil suits to recover losses sustained as a result of fraud or violations of Securities laws.

The market for cryptocurrency and blockchain technology is growing quickly. In spring of 2013, the overall cryptocurrency market capitalization was sitting under $1.6 billion. By the end of 2013, the overall market cap reached $15.2 billion until the market crashed after the popular Mt. Gox exchange lost hundreds of millions of dollars of cryptocurrency due to security failures on their exchange. At the end of 2014, the crypto market cap reached about $6 billion. It reached $7 billion by the end of 2015, $18 billion by the end of 2016, and $600 billion by the end of 2017. The immaturity of the fast-emerging crypto market has made it prone to extraordinary volatility as it begins to increasingly capture the public’s attention. Consider this; one year ago, the overall crypto market cap was $28.2 billion. Today the market cap is around $330 billion. In one year, the market has grown over 1,100%.

Increasing Amounts of SEC Filings

As the crypto market grows, a growing number of crypto and blockchain related companies are also filing with the Securities Exchange Commission (SEC). The SEC now treats the sale of many cryptocurrencies as securities, prompting many crypto and blockchain companies to file Form D Notices that offer certain exemptions from the Securities Act's registration requirements. In the SEC’s EDGAR database, a total of 39 crypto and blockchain related companies with the words “crypto” and “blockchain” in their company names have filed notices with the SEC since 2014. Four of those companies filed from 2014-2016. Twelve filed in 2017, and twenty-three have filed just four and a half months into 2018. From this data, we can infer that the crypto market is maturing rapidly as companies begin to take U.S. cryptocurrency regulations seriously.

Types of Companies Filing With SEC

Investment Companies

28 of the 39 (72%) companies in the data-set filed as investment companies. The rise of these investment companies in the crypto market is evidence that large-scale institutional investments are increasingly pouring into the market. The rapidly growing demand from institutional investors into the market will likely continue to boost the overall crypto market cap in the coming years.

Blockchain Technology Companies

8 of the 39 (20%) companies in the data-set focus on blockchain and computer technology. In a major step forward, these companies are among the first blockchain companies to file with the SEC. Many blockchain companies are often perceived to be fraudulent (sometimes because they are). Filing with the SEC brings instant credibility to these companies by creating public transparency and subjecting them to the jurisdiction of the U.S. government.

These companies provide many valuable uses for blockchain technology. Crypto Bridge Network aims to 1) build a network of global crypto teller machines; 2) use blockchain technology to streamline and facilitate local and international transactions; 3) develop a mobile wallet app that can hold multiple cryptocurrencies; 4) and promote education and awareness of cryptocurrencies through a public service campaign. Crypto Alpha and Crypto Global allow people to invest into ownership and take profits from the companies’ cryptocurrency mining operations. Crypto Move provides decentralized data storage and protection, and can integrate with decentralized crypto-token backed storage systems. CryptoSecurities Exchange is creating an SEC compliant blockchain-based Securities exchange. Blockchain Foundry offers targeted blockchain development and consulting services. Blockchain Power Trust provides 100% green-energy facilities to power cryptocurrency mining and validation at low costs in an environmentally friendly manner.

While the crypto market grows, crypto and blockchain companies are increasingly filing with the SEC to do business underneath U.S. regulatory institutions. As a result, it is likely that crypto markets continue to mature and blockchain technologies continue to progress. Cryptocurrency is quickly moving from the fringe to the mainstream as blockchain technology begins to prove its value to the world.

The evolution of the U.S. Investment Fund market has prompted fund sponsors to become increasingly innovative in the creation of registered funds (e.g., exchange-traded funds and money market funds). Recently, however, the U.S. Securities and Exchange Commission (S.E.C.) made the decision to – at least temporarily – restrict registered funds from holding cryptocurrencies and cryptocurrency-related products. The S.E.C. has attributed its hesitancy to the investor protection issues that must be addressed before it allows crypto funds to hit the market. Unfortunately, eager investors looking to gain exposure to the crypto market in their retirement portfolios (and, otherwise, traditional portfolios) will have to continue utilizing exchange platforms. Such platforms restrict investors to investing in cryptocurrencies coin-by-coin, as opposed to building a portfolio. However, the S.E.C.’s vetting of the crypto industry may benefit investors in the long run; for instance, crooked companies such as Bitconnect will be weeded out. The S.E.C. has signaled that it will not allow crypto funds to hit the market until the following questions have been answered.

Valuation

Net Asset Value (NAV) of traditional funds, such as exchange-traded funds (ETFs) and mutual funds, is calculated on a daily basis. This allows investors to have full transparency in knowing exactly why the fund is worth what it is worth. Transparency is possible because the assets these funds hold are highly regulated by valuation procedures and policies. When it comes to valuation, the chief concern is whether there is sufficient information to calculate an honestNAV if a cryptocurrency were to be included. For example, what if a cryptocurrency were to diverge into different paths (i.e., a “fork”)? Think Ethereum and Ethereum Classic. How would a fund handle an asset diverging into two of essentially the same asset, each with a different price? What policies would have to be implemented to prevent or remedy such an event?

Liquidity

Questions of liquidity highlight one of the biggest concerns in the crypto industry. A key feature of the funds currently available in the market is governed by Rule 22e-4. This rule, the new fund liquidity rule, requires investors to limit their illiquidinvestments to 15% of the fund’s assets. Open-end funds, such as the ones described throughout the S.E.C.’s statement, offer daily redemption. Not only do some cryptocurrency exchange platforms offer little transparency on what exactly is happening with investor money behind the scenes, most platforms take days or weeks to process a transaction. If funds were to hold crypto assets, how could we ensure sufficient liquidity? Would we have to consider these funds illiquid by default? Would funds investing in crypto futures have a substantial effect on the overall crypto futures market? Most importantly – would you, the investor, feel comfortable investing in a fund that could not promise you liquidity?

Custody

To ensure the safekeeping of investor assets, there are many checks in place guaranteeing that funds maintain custody of their holdings. This immediately begs the question of how a fund would be able to satisfy these custody requirements. Would funds be a target for cybersecurity threats and digital wallet hacks? The crypto futures market will surely expand in the coming years, which poses an additional problem – some futures will be cash settled (paid in net difference) and some will be physically delivered (paid by delivery of entire asset). How would the fund plan to provide custody for two different crypto futures contracts if the fund is not directly holding the assets?

Arbitrage

Simply put, an ETF (or any other open-ended fund, for that matter) must have a market price that does not deviate from the NAV. However, since the markets are not perfect, there are opportunities for arbitrage. The underlying securities in funds currently offered on the financial markets make it very tough for arbiters to take advantage of large price differences, because substantial differences rarely exist. Now with that in mind, does the extreme volatility of the crypto markets mean more opportunities for arbitrage? How might the failure or closure of a crypto exchange platform affect the market price of the NAV?

Potential for Manipulation

There have been growing concerns regarding the potential for manipulation and fraud in crypto markets. The recently exposed operations of Bitconnect provide a cogent example. Surely, as the industry matures, more of these questionable operations will come to light. So far, issues have been more attached to crypto products and services than with the cryptocurrencies themselves. To separate genuine companies from scams and allow them to infiltrate one of the most regulated markets in the world, there remains a lot of vetting to be done by regulatory agencies. Will potential investors obtain sufficient transparency and information to fully comprehend the risks they may be taking?

To Conclude…

The S.E.C. essentially stated that, until the aforementioned questions are answered, fund sponsors would be wasting their time if they attempt to initiate registration of a crypto fund. How will these questions be answered, and how long are we going to have to wait? With how quickly the crypto space moves, answers could come within mere weeks or months. Or, perhaps, cryptocurrencies have no place in the investment fund market at all. The S.E.C.’s pursuit of answering these questions may very well correlate into a weeding out of dubious crypto-companies and open doors for more self-regulated crypto-companies. If a company wants its coin to be included in the U.S. investment fund market, a good place to start would be to ensure conformity to the various securities and investment acts passed by Congress.

The cryptocurrency markets are often described as the wild west. But they do not exist in a vacuum, and as recent enforcement actions and suits against Bitconnect, a crypto-exchange and lending platform, show, regulators and plaintiff's side attorneys are increasingly willing to step in to protect investors that have been the victims of wrongdoing.

On January 4, the Texas Securities Commissioner issued an Emergency Cease and Desist Order against Bitconnect. North Carolina followed suit on January 10, just days later.

These orders noted that investments in Bitconnect's Lending Program and Staking Program should have been registered as securities, but were not. As a result, Bitconnect was selling unlicensed securities, and thereby violating Texas Securities Act and State Securities Board Rules and Regulations.

Bitconnect’s lending platform raised several additional red flags.

First, the company offered to deliver “annualized returns of 100% or more” from users’ investments.

Second, rumors of Bitconnect’s Ponzi Scheme had been flying around the crypto community for months. Bitconnect’s extensive advertising was targeted towards recruiting sales agents (“affiliates”) who received commissions based on referrals resulting in investments. Bitconnect sales agents targeted potential investors in Texas as well as in other states; however, these agents were not registered to sell securities in states such as Texas.

With Bitconnect being only five days away from its January 9 Initial Coin Offering (ICO) sale, the Order did not paint a pretty picture for prospective investors. In effect, the Cease and Desist Order was a death sentence for Bitconnect.

On January 16, Bitconnect announced that it was shutting down. Shortly after, the price of BCC collapsed from over $400 to around $15 per share. Following this dramatic collapse, a class action lawsuit was filed against Bitconnect in Florida.

The Bitconnect ordeal serves as a reminder that if something is too good to be true, it probably is. There are still many unknowns regarding the future of the crypto-lending space. And while investors in Bitconnect, and other fraudulent schemes, may be able to get some of their funds back through litigation, it is important to exercise common sense and remain vigilant in the market place.

It is no secret that many people think of cryptocurrency trading as the wild west. As a result crypto traders that suffer losses due to failures on crypto exchanges often do not know where to turn. However, a number of major exchanges (GDAX, Gemini, Kraken, Poloenix, and Bittrex) are based in the United States and thus subject to U.S. laws. They may therefore be liable for "flash crashes" that harm traders on their exchanges.

As all too many crypto-traders are aware, a flash crash is a rapid decline in the price of a cryptocurrency or token followed almost immediately by a rapid return to its earlier price. This rapid price decrease can trigger stop orders and force the liquidation of margin positions at prices far below the prevailing market price. Unfortunately, these flash crashes are often accompanied by exchange unavailability, leaving traders unable to effectively enter and exit positions and manage risk. The only logical explanation for these crashes is that they are the result of market manipulation, exchange failure, or both.

While almost all the major U.S. exchanges have experienced a flash crash at some point in the last year, this post will focus on the March 1, 2017 flash crash in GDAX's Ethereum/U.S. dollar market as the scale and speed of this crash illustrate the potential impact of such crashes. Prior to that crash the price of Ether had been trading consistently between $250 and $400 on the major U.S. exchanges for the preceding month.

In the minutes leading up to the flash crash, Ether was trading at approximately $310 on GDAX, with the price similarly between $290 and $310 per Ether on other major U.S. exchanges. Then GDAX's website ceased functioning for many users. Its web platform becoming entirely un-responsive leaving many unable to buy or sell Ether or manage their margin positions. Although GDAX's trading rules state that it may "[d]isable the ability to place new orders" when "technical reasons prevent or degrade traders' ability to place or cancel orders," it took no such action and left trading open.

In the moments that followed, the price of Ether plunged from around $300 to ten cents. This dramatic decrease was unique to GDAX as the price of Ether on other U.S. exchanges remained between $290 and $310. Within moments the price of Ether on GDAX recovered to approximately $300, but not before many users Ether holdings were forcibly liquidated at prices substantially below the prevailing market price. This apparently allowed certain traders to purchase Ether for as low as ten cents and recognize a 300,000% return in a matter of minutes.

However, this explanation defies common sense and basic assumptions people hold about functioning markets and exchanges. No rational actor would have sold Ether at prices as low as $224 when it could be sold for over $310 on other U.S. exchanges. Rather, a rational actor selling a very large volumes would spread those sales out both temporally and across exchanges in order to receive the highest possible price for their sale. The only logical reason to make a sale large enough to clear an exchange's order book would be to force liquidations and allow co-conspirators with very low limit order (e.g., those between $0.10 and $250) to scoop up liquidated Ether for pennies on the dollar.

Never before has an asset lost 99% of its value in moments only to recover that value in its entirety moments later. This type of market movement cannot be explained by the supply and demand principles that we trust to govern our markets.

The good news is that crypto-traders may be able to recover losses sustained as a result of a flash crash. If you have sustained substantial losses as the result of a flash crash it may be worth reaching out to an attorney to see what your options are. Depending on the circumstances surrounding your particular loss, you may be able to pursue claims for: